DBRS keeps Spain, Ireland sweating on rating cuts

June 22, 2012|Reuters

FRANKFURT (Reuters) - Credit rating agency DBRS said on Friday it would decide by late August whether or not to cut its ratings of Spain and Ireland below the crucial A threshold, a move that could substantially raise the cost of funding for the two countries' hard hit banks.

A downgrade from the A (high) rating DBRS now has for Spain and A (low) for Ireland, to triple-B or lower would - under current European Central Bank rules - trigger the ECB to charge commercial banks an additional 5 percent penalty for using Spain's bonds as collateral in its lending operations.

DBRS is one of four rating firms the ECB uses to rate collateral and, following Moody's three-notch downgrade of Spain earlier in June, is the only one saving both Spanish and Irish bonds from the extra charge.

The ratings agency said it wanted clarity on four factors before making its decision on whether to downgrade, namely the stabilization of the Spanish banking sector, the EU-IMF loan program for Greece, funding conditions in Spain and the ongoing Europe-wide policy response to the debt crisis.

In a move that will cushion any possible DBRS downgrades, the ECB said on Friday it would start accepting a wider range of asset-backed security-style collateral for banks as well as assets of lower quality.

Italy and Portugal, two of the other countries at the center of the euro zone debt crisis, are also in line for a potential DBRS downgrade.

Fergus McCormick, DBRS's head of sovereign ratings gave an extremely downbeat interview of Spain's situation to Reuters last week. He and senior DBRS official Alan Reid offered Spain a glimmer of hope on Friday though, welcoming the results of stress tests of its banks this week.

"DBRS views these estimates as positive because they remove some uncertainty, and appear to be well covered by the 100 billion (bank bailout) announcement," they said.

"Another important consideration is the effect on Spain's public debt of the EFSF or ESM (bailout funds) injection into the Spanish banks, which will help determine any change in the Spanish government's debt trajectory," they said, also adding that comprehensive crisis action by the euro zone would help stabilize the ratings.